Taxation and Regulatory Compliance

Is Long-Term Care Insurance Tax Deductible for an S Corp?

Unpack the tax treatment of long-term care insurance premiums for S corporation stakeholders. Learn about deductibility and reporting nuances.

S corporations offer the liability protection of a corporation and the pass-through taxation benefits of a partnership. Many small business owners choose this entity for its operational flexibility and potential tax advantages. Long-term care insurance is a key consideration for financial planning. It covers costs for services such as assistance with daily activities, which can be provided in various settings including at home or in a nursing facility.

Understanding Qualified Long-Term Care Insurance Contracts

For long-term care insurance premiums to receive any favorable tax treatment, the policy must be a “qualified long-term care insurance contract” as defined by Internal Revenue Code Section 7702B. A policy must be guaranteed renewable, meaning the insurer cannot unilaterally cancel it or refuse to renew it, except for nonpayment of premiums.

The contract must also not have a cash surrender value or provide for distributions other than for qualified long-term care services. The policy must cover only qualified long-term care services, which include necessary diagnostic, preventive, therapeutic, rehabilitative, maintenance, or personal care services required by a chronically ill individual. Only premiums paid for policies that strictly adhere to these criteria are eligible for tax consideration.

Deductibility for S Corporation Owner-Employees

For S corporation owner-employees who own more than 2% of the company’s stock, the tax treatment of long-term care insurance premiums differs from that of other employees. These “2% shareholders” are treated similarly to partners in a partnership for purposes of health insurance deductions. When an S corporation pays for a qualified long-term care insurance contract on behalf of a 2% shareholder, the premium amounts are considered additional W-2 wages to that shareholder.

The premium payments are included in Box 1 of the shareholder’s Form W-2, increasing their taxable income. The shareholder then has the opportunity to deduct these premiums as a self-employed health insurance deduction on their personal income tax return, specifically on Schedule 1 of Form 1040. This deduction is taken “above-the-line,” meaning it reduces their adjusted gross income (AGI) directly, which can be beneficial. Unlike other medical expense deductions, the self-employed health insurance deduction for qualified long-term care premiums is not subject to the 7.5% adjusted gross income threshold that applies to general medical expense deductions.

However, the amount of long-term care premiums that a 2% shareholder can deduct is subject to age-based limitations set annually by the IRS, as specified under IRC Section 213. For the 2025 tax year, these limits are: $480 for individuals aged 40 or less; $900 for those more than 40 but not more than 50; $1,800 for those more than 50 but not more than 60; $4,810 for those more than 60 but not more than 70; and $6,020 for individuals more than 70 years old. These limits apply to the portion of the premium that can be treated as a medical expense.

Deductibility for Non-Owner Employees

When an S corporation pays for qualified long-term care insurance for its non-owner employees, those who own 2% or less of the company’s stock, the tax implications are generally more straightforward. The premiums paid by the S corporation are typically considered a deductible business expense for the corporation itself. This means the S corporation can reduce its taxable income by the amount of the premiums paid.

For the non-owner employee, these premium payments are generally excludable from their gross income. This treatment is similar to how other employer-provided health benefits are handled, offering a tax-free benefit to the employee. Furthermore, the age-based limitations on deductible premium amounts that apply to owner-employees do not apply when the S corporation pays for long-term care insurance for its non-owner employees. The full premium amount paid by the corporation for these employees is typically deductible by the business and excluded from the employee’s income.

Reporting Requirements for Premiums Paid

Understanding where and how long-term care insurance premiums are reported on tax forms is essential for compliance. For 2% S corporation owner-employees, the S corporation reports the premiums paid on the shareholder’s Form W-2. These amounts are typically included in Box 1 (Wages, tips, other compensation) and may also be reported in Box 14 for informational purposes, indicating they are long-term care insurance premiums. The shareholder then claims the self-employed health insurance deduction for these amounts on Schedule 1 of their personal income tax return, Form 1040. The S corporation itself does not deduct these premiums as a health insurance expense for the owner on its Form 1120-S, as they are treated as part of the owner’s compensation.

For non-owner employees, the S corporation deducts the premiums paid as a business expense directly on its Form 1120-S, the U.S. Income Tax Return for an S Corporation. These amounts are generally not reported as taxable income on the employee’s Form W-2, reflecting their excludable nature. Should an individual, whether an owner or non-owner, pay for a qualified long-term care policy personally, they might be able to include these premiums as a medical expense deduction. This deduction would be claimed on Schedule A (Itemized Deductions) of Form 1040, subject to the adjusted gross income threshold of 7.5% and the age-based premium limits previously discussed.

Previous

How Much Does the Winner of Survivor Get After Taxes?

Back to Taxation and Regulatory Compliance
Next

What Can Someone Do With a Lost Check?